Making the Most of Your Charitable Giving

by Barbara Jo Smith

Fall 2001

At this time of year, many people are considering gifts to charities and religious organizations. Although writing a check may be the simplest way to make a gift to charity, other gifting options are available. These options may allow a person to give more value to the charity without changing the value that person is giving away. The suggestions in this article are illustrations only. The actual tax consequences of any charitable gift depend on a person's individual tax situation. Therefore, each person should check with his or her attorney or accountant to confirm the tax result of a particular gift.

Know Your Charity

To make the most of a charitable gift, the charity must actually use the funds for charitable purposes. The first step is to check that the charity has received a 501(c)(3) designation from the IRS. Section 501(c)(3) is the section of the Internal Revenue Code defining charitable organizations. The charity may be able to give the donor a copy of its letter from the IRS or the donor can check with the IRS on its web site for tax exempt organizations.

www.irs.gov/bus_info/eo/eosearch.html

The donor may also want to investigate further to find what percentage of his or her contributions are used for the charity's programs versus administrative costs. Each charity must complete a Form 990 each year. The charity is required to give the form to any person who requests.

Cash

Generally, cash gifts can be deducted up to fifty percent of a donor's adjusted gross income. There is also a five-year carryover provision which allows the donor to carry forward any gifts exceeding fifty percent of adjusted gross income into as many as five additional tax years.

 Appreciated Securities

Perhaps one of the simplest and most overlooked ways to give to charities is to give stock or bonds that have increased in value. If the donor has held the stock or bond for more than twelve months, the donor's charitable income tax deduction can be for the full fair-market value, and the donor will not have to pay tax on any capital gains. The donor's deduction is limited to thirty percent of his or her adjusted gross income, but the five-year carryover is also available. When the charity sells the stock or bond, it will not have to pay any capital gains tax because it is a tax-exempt entity.

For example, Mr. Smith was considering a gift of $10,000 to honor his parents. He purchased stock in 1980 for $1,000 and has held it ever since. Today, the value is $10,000. If Mr. Smith sells the stock, he will have a taxable gain of $9,000. Assuming a combined federal and state capital gains rate of 29%, he will have to pay $2,610 to the government for taxes. Only $7,390 remains to give to charity resulting in only a $7,390 deduction. If Mr. Smith transfers the stock to the charity, he will pay no capital gains tax and will receive a $10,000 charitable deduction. The charity, when it sells the stock, will have $10,000 which is not subject to any tax.

Gift Annuity

Many charities offer annuities for donors. The donor transfers cash or appreciated securities to the charity. In return, the charity promises to pay to the donor a fixed or variable payment each quarter for the remainder of the donor's life. The donor receives a charitable deduction for a portion of the contribution. A portion of the payments to the donor are taxable income. If appreciated property is transferred to the charity, then a portion of the payments to the donor is treated as capital gain. The minimum contribution allowed may be as low as $5,000 depending on the charity.

Charitable Trusts and Community Foundations

Many other different charitable giving devices are available to satisfy donor requests. Charitable trusts and Community Foundations are only a few. Development directors at foundations and charities can be a great source of information on these devices.